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Why Libertarians Should Support a Carbon Tax—Even if They Can’t Love It

In the first two parts of this series, I discussed the reasons why both conservatives and progressives should love a carbon tax, and why many of each political persuasion do. In this third installment, I take up the more difficult case of libertarians.

There is no way that a good libertarian could love a carbon tax, or any tax, for that matter. Classical liberal principles hold that the state should play a role in economic affairs only when there are problems the cannot feasibly be handled in the private sector. Even those who support a role for the state in, say, criminal justice or national defense, do so only reluctantly. They secretly pine for a libertarian utopia like that in Robert Henlein’s The Moon is a Harsh Mistress, where even those functions were the responsibility of the marketplace.

Nonetheless, I think it is possible to make as good a case that libertarians should support a carbon tax as that they should endorse a government role in courts or the military. Here are some reasons why.

The polluter should pay

To begin, the principle that the polluter should pay has long been a part of libertarian theory. In his 1962 classic, Man, Economy, and State, Murray Rothbard expressed it this way:

In so far as the outpouring of smoke by factories pollutes the air and damages the persons and property of others, it is an invasive act. . . . Air pollution is not an example of a defect in a system of absolute property rights, but of failure on the part of the government to preserve property rights.

A person whose pollution harms another’s person or property should pay for the resulting harm. People do not pollute just for the fun of it. They do so because polluting, when unrestricted, is a cheap way of disposing of wastes. Paying for waste disposal is just as much a proper cost of business or household management as paying for any thing else—energy, labor, transportation, or whatever.

A polluter cannot escape the duty to pay for harm to others simply because it would be expensive to avoid polluting. Yes, it may cost more to build a smokestack with a filter than one without, or more to treat sewage than to dump it directly into a river. Beyond some point, the harm, at the margin, may be less than the cost of abatement, in which case releasing pollutants into the environment may be the economically efficient decision. Efficient or not, however, the polluter should still pay for any remaining harm done even after the efficient degree of abatement has been carried out.

All this leaves open the question of how to ensure that the polluter pays. First, though, we need to address another important issue.

Are greenhouse gas emissions really harmful?

Specifically, we need to ask whether carbon dioxide and other greenhouse gasses (GHGs) are, in fact, harmful pollutants. If they are not, libertarians are off the hook: No harm done, no payment due, no need for a tax. However, if you are tempted to seek that escape route, you need to ask yourself, which comes first? Are you evaluating the relevant science objectively, or is your judgment of the scientific evidence influenced by an a priori aversion to taxes or other government interventions?

The libertarian icon Friedrich Hayek saw attitudes toward science as one of the key distinctions between libertarians (he preferred the term “liberal,” in the European sense) and conservatives. In his famous essay, “Why I Am Not a Conservative,” he wrote:

Personally, I find that the most objectionable feature of the conservative attitude is its propensity to reject well-substantiated new knowledge because it dislikes some of the consequences which seem to follow from it—or to put it bluntly, its obscurantism. I will not deny that scientists as much as others are given to fads and fashions and that we have much reason to be cautious in accepting the conclusions that they draw from their latest theories. But the reasons for our reluctance must themselves be rational  and must be kept separate from our regret that the new theories upset our cherished beliefs. . .  By refusing to face the facts, the conservative only weakens his own position.  . .  Should our moral beliefs really prove to be dependent on factual assumptions shown to be incorrect, it would hardly be moral to defend them by refusing to acknowledge facts.

He was not writing specifically about climate change (the example he gave was the theory of evolution), but his point applies. We should separate our rational evaluation of climate science from our regret that human responsibility for climate change might upset our cherished beliefs about the ability of a market economy to operate justly and efficiently without the intervention of government.

Mere uncertainty is not enough. Some aspects of climate science are almost universally accepted,  for example, that concentrations of GHG in the atmosphere influence the climate and that human activity has affected concentrations of GHG. Other points are not fully settled, for example, the sensitivity of global temperatures to a doubling of CO2, the interaction of natural and anthropogenic climate drivers, and the relationship between climate change and specific weather events. However, complete certainty is not required in this case.

There are many areas of both private life and public policy where we act to avoid harm that is not certain to occur, or, if it does occur, is not easily quantified. We accept limits on driving while intoxicated even though there is a good chance that any individual drunk driver will make it home from the tavern without hitting anyone. We allow victims of assaults or negligent acts to sue for pain and suffering even though placing a monetary value on the pain is highly inexact. By the same token, we should be willing to accept restraints of GHG emissions if we think the preponderance of evidence suggests that they are harmful, and to place an estimated value on the harm even if we know it may only be an approximation.

If you have looked dispassionately at the relevant science, and you are satisfied, based on the preponderance of evidence, that GHG emissions pose no risk, so be it. Otherwise, read on.

How should polluters be made to pay?

If we accept the principle that polluters should pay, and accept that GHG emissions are a form of harmful pollution, we still have to deal with the issues of how polluters should be made to pay.

For many libertarians, the preferred approach is to rely on private negotiations backed by the right to take legal action for the pollution-related torts of trespass, nuisance, or negligence. If toxic fumes from a neighboring factory damage your health or your property, sue the owners for damages or ask for an injunction requiring them to stop. A 1982 paper by Rothbard, “Law, Property Rights, and Air Pollution” describes this approach in detail.

Unfortunately, the tort law approach to making the polluter pay works less well as the number of pollution sources and victims grows. Yes, you, or you together with a group of close neighbors, can very likely get somewhere with a lawsuit against pollution from a factory next door, easily traced to its source. However, when there are many sources, some of which are far from the many victims, it is difficult to show that pollution from any one source caused the harm to any one individual, even if the harm is collectively large. That is often the case with air pollution, not only climate change, but also urban smog or acid rain.

When a large number of sources and remote victims make the tort law approach unworkable, we have to choose a second-best approach. Our options include regulations that require specific technologies or impose source-by-source emission standards, placing a price on pollution by means of a tax or cap-and-trade mechanism, or doing nothing.

Command-and-control regulations, which are both intrusive and inefficient, are the least attractive alternative to libertarians. Doing nothing would be the preferred alternative in cases where the harm was trivial. When the harm is not trivial, a policy that puts a price on pollution should be the preferred approach.

This is not the place to get into a long discussion of the relative merits of pollution taxes vs. cap-and-trade. Briefly, it seems to me that on libertarian grounds, pollution taxes are less objectionable than cap-and-trade for three reasons. First, they are arguably the more economically efficient alternative. Second, they are less complex and less open to political favoritism and corruption. Third, revenue from pollution taxes can be used to reduce marginal rates on other taxes that produce well-known distortions of market incentives, such as payroll taxes or corporate profits taxes.

The bottom line

The issue of climate change is a source of cognitive dissonance for libertarians. It creates a tension between the principle that pollution is an unjust assault on the persons and property of others, and the principle that disputes are best resolved through private negotiations and civil law. Some libertarians, like many conservatives, manage to suppress the dissonance by convincing themselves that greenhouse gas emissions are harmless. If they are unable to do that, it is reasonable for them to support the least intrusive, least inefficient government intervention available to deal with the problem. In my view, that alternative is a carbon tax. Even if it is a tax that libertarians cannot love, it is one they should support.

This is the conclusion of a three-part series. The first two parts were Why Conservatives Should Love a Carbon Tax—and Why Some of Them Do and Why Progressives Should Love a Carbon Tax—Although Not All of them Do. For more on the topic of this post, see my book TANSTAAFL: A Libertarian Perspective on Environmental Policy.

Addendum: About a year after I wrote this, Jerry Taylor, formerly of the Cato Institute, founded the Niskanen Center, a libertarian 501(c)(3) think tank that works to change public policy through direct engagement in the policymaking process. The center’s blog Climate Unplugged quickly became a leading source for libertarian support of a carbon tax and libertarian critique of conservative views on climate change.

38 Responses to “Why Libertarians Should Support a Carbon Tax—Even if They Can’t Love It”

T-revJuly 15th, 2013 at 3:24 am

I would consider myself a Libertarian, albeit not particularly dogmatic and I completely agree with what you are saying and your logic behind it.

EugenRJuly 15th, 2013 at 8:13 am

Dear Ed, where the reason doesn't work, maybe humor can work. so here is my proposition to how to help with the carbon tax.

It is hard to explain to the simple minded people that not making carbon tax means subsidizing the energy consumption. Any kind of subsidy means price and free market price mechanism distortion. Would the Liberal-Conservatives support a direct subsidy on any product sold freely on the market be it a service or merchandize? Probably not. But when the subsidy is not directly given by the government to the producer but indirectly by the general public, whose environment is as you said correctly downgraded, it is covered to the eye so automatically opposed. Other problem of the simple minded people opposing carbon tax is, that they are more concerned with the words than with the meaning of these words, so the solution should be change of semantic. The legislators who support carbon tax shouldn't call it any kind of "XXX tax", but price that no one, is opposing it (not even the most conservative tee party follower can't say, price is a negative word). I have many beautiful and confusing names that will leave the simple minded legislators with gaping mouth, like "tide up service price", "clear sky price", "clean water price", one even better, "Glacier preservation price" or this one "Sustainable fresh air price". I want to see those legislators opposing fresh air, clean water or clear sky. Since the carbon tax opposers never use in their argumentation logic or evidence, there is no need to try to explain to them with evidence why the "clean air price charge", will eventually help to clean the air.

Jardinero1July 15th, 2013 at 11:14 am

This statement: "not making carbon tax means subsidizing the energy consumption" only makes sense if you begin with the premise that every single item of consumption should be taxed in the first place. Otherwise your statement is fallacious. Because an item is not taxed does not mean it is subsidized.

EugenRJuly 15th, 2013 at 2:23 pm

I thought in this forum i do not have to explain the basics, but it seems i was wrong. Taxation positive or negative (in other word subsidy) is a tool to "correct" the relative prices of "PRODUCTS", in any society whenever a social life comes to existence. If a hunter-gatherer teaches his son how to use a bow, he is subsidizing education by using energy to teach the next generation how to use a bow, instead of enjoying this energy for his individual pleasure. By the way, it appears even in animal kingdom this kind of subsidy is very common, apparently even in the lowest forms of life. An other form of taxation will be when a father punishes a child, trying to rape his sister, or brother kills his brother as in the following story, http://www.bartleby.com/108/10/13.html is a kind of diversion of resources from pure individualistic consumption to a common socio-biological good, (preventing genetic degradation of the spices).
To make it short, the TAXATION, be it positive or negative, is only a institutionalized modern version of primitive act of intervention of authority, (in this case government) in restraining unsocial behavior of an individual in the society to protect the more common good than directly and immediately fulfilling the lust of an individual. If we would live in the land of Eden, where people know only love and altruism and no lust, (Brrr, what a boredom) maybe we would not need such an authority and "No More Taxation", as some of the politicians so often like to proclaim, but never fulfill.
Now as to the carbon taxation, the question is not if positive or negative taxation (subsidies) is legitimate or not, but if the society should ask carbon users to compensate it for the future cost of their consumption. This including the future cost of repairing and cleaning the devastated environment by exceeded usage of hydro-carbon, exactly as hunter gatherers of modern age, the homeless people who live out of gathering garbage have to pay tax whenever they buy their alcohol beer to wash their personal agony. Again to make it as simple as possible, if a car producer doesn't want to go bust, the car's selling price has to be higher than its cost, caused in the past or will cost in the future (future cost; interest rate or recycling tax). And now since the environmental damage of carbon usage will force the society to make in the future a big clean up of the environment, the question is not if to tax it or not but who will pay when the pay day comes. We, the present carbon polluters, or the future generation of our children.
Here let me make a citation from my book http://rodeneugen.wordpress.com/2013/04/10/1801/
……..the primary long-term problem of the world economy: world environmental stability. If we believe that the depletion of the world’s resources is an inevitable process (and this is a question of faith and not conclusively based on evidence), we must believe that the world environment as a major resource is also limited. Yet any policy of creating ecological sustainability demands substantial revolutionary sacrifices of the “modern human life style”……………..

Jardinero1July 15th, 2013 at 3:06 pm

It's not that I don't see your point. I read a little anarchist literature, here and there, David Graeber being my favorite.

But that's not the kind of taxation we are talking about. Your basics are not the basics as generally understood on this forum or as it is understood since the advent of the modern nation state two and a half centuries ago. In contemporary usage, taxation is the exaction of a payment by the state on a non-state actor for the benefit of the state.

EugenRJuly 16th, 2013 at 12:04 am

Again very wrong. You said………. taxation is the exaction of a payment by the state on a non-state actor for the benefit of the state.

Taxation is the positive side (from the perspective of the Government) of the government activity. The negative side is all the services and money transfers the Government provides. For example;
When EU and the US decided to give subsidies to agriculture or the peasants, they had many different issues in mind like; stabilizing the income of the farmers, sustaining the rural communities, reducing the food prices etc. Non of these are about "state benefit", but serve certain communities, way of life, ideology, in short political issues. The same is when the government subsidizes the education, health, pension payments, social security payments, etc. All these are the negative side of the taxation. You can argue the government expenditure in security is not of this kind, but then you should also say you don't belong to the community you live in (US, Western world, Russia, China or any other sovereign country), be it anywhere, since every community as a whole needs communal protection, and to achieve it in the present world and present state of the humanity, it needs army and army costs money.
To make it short to look on taxation as standing independently from the governments activity as a service provider is wrong perspective. More information about the subject you can read in my book; http://rodeneugen.wordpress.com/2013/04/10/1801/ Chapter 5-7

Jardinero1July 16th, 2013 at 3:51 pm

Prof Dolan's original post speaks to libertarians. I stated the standard libertarian replies to calls for taxing bads. If you want to convince a libertarian that a carbon tax is preferable to all other solutions or even preferable to just the status quo, one must address those objections.

SnarkFetishJuly 15th, 2013 at 10:21 am

The only legislation I would ever support is legislation to repeal other legislation.

Certainly, pollution is bad.
What's worse than pollution? Politicians!
They are their own breed of pollution.
Politicians love to spin any need, problem or issue into an excuse to expand government.

One of the four lies of taxation is, "there isn't any other way."
A tax is bad enough when it is spun as a way to fund some grandiose progressive social program, but when a proposed tax is merely punitive, like this one, it's hard to hide the true intent: a political power-grab.

Can there be, should there be a serious dialogue on how to reduce carbon emissions? Yes!
But it can only happen once everybody gets the insidious notion out of their heads that bigger, more powerful, more expensive government can be a solution to any problem, ever.
Otherwise it's just politicians having a pissing contest.

Ed Dolan EdDolanJuly 15th, 2013 at 11:23 pm

I don't know if you read the first part of this series, which addressed some concerns that conservatives and libertarians share, in particular, you concern that "Politicians love to spin any need, problem or issue into an excuse to expand government."

Because of that concern–and it is a legitimate one–much of the literature about carbon taxes focuses on a revenue neutral version, that is, one that leaves the total resources available to government unchanged. The question then becomes whether a carbon tax is less undesirable than at least one other tax. If there is at least one other tax that is even worse than a carbon tax, then replacing it with a carbon tax would be a net gain, and would not change the size of government at all.

Many people dismiss the notion of a revenue neutral carbon tax because they don't trust politicians to implement it in a way that is truly revenue neutral. That may be your belief, however, I would point out that it is a political argument, not an economic one.

The economic argument should be over whether a revenue neutral carbon tax would be a good idea *if it were politically possible.*

In other writing about tax reform, I have often made the point that the question of how much revenue the government should raise, and how it should raise that revenue, are distinct questions. Mixing them together does not move the discussion forward, in my view.

Jardinero1July 15th, 2013 at 10:47 am

Fundamentally, there is no libertarian argument for more taxes.

Earnest libertarians spend their days highlighting the fallacies in economic arguments. The argument for carbon taxes rests on premises which are fallacious. The foremost of which is that the tax code is an effective way to limit bads; thebad in this case being CO2. Another rationale for taxing bads is to price in costs that the bad creates but no one is paying for. Some things to bare in mind when talk of novel new taxes on bads arise:

1. The primary purpose of taxation, is not to modify behavior, but to provide revenue to the state. This concept is lost in the conversation about taxes.

2. The science is not settled, that taxes are an effective way, to control behavior. There is little real world data which shows that taxes modify behavior in knowable, predictable ways and much real world data that taxes create unknowable unintended consequences. Every tax has unintended consequences which, by definition, cannot be known until after the fact. How can you measure the efficacy of a proposal if you don’t even know the consequences? With so many unknown unknowns, a libertarian would not advocate more taxes as a solution.

A regulatory/legal solution will be more expedient and maintain the focus on the bad itself. This is how we handle most of the bads in our society. We don’t tax murder, we punish murder. We don’t tax theft, we punish theft. We don’t tax littering, we punish littering. Pollution is more akin to littering.

3. It is only an assumption, not a fact, that a bad, is in fact a bad.

4.Assuming, for the sake of argument, that a bad is a bad; it is still another assumption that the cost of the bad is not already priced in.

Ed Dolan EdDolanJuly 15th, 2013 at 11:32 pm

See my answer to the comment by "SnarkFetish" above (where do people get these names?)

Additionally, let me reply to your comment that "A regulatory/legal solution will be more expedient and maintain the focus on the bad itself. This is how we handle most of the bads in our society. We don’t tax murder, we punish murder. We don’t tax theft, we punish theft. We don’t tax littering, we punish littering. Pollution is more akin to littering.

First of all, we punish many misdemeanors by fines, which are formally indistinguishable from taxes. Littering is an example. I don't want to go into a long discourse on libertarian theory, but probably you have encountered writers who think that the focus of criminal justice in general should be on restitution (paying for harm) rather than punishment (revenge). But that is not my main point.

My main point would be that we could have looked at the whole problem through another lens, namely, by saying that what we call "pollution" should really be interpreted as use of air or water as a sink for disposal of wastes. We don't want to punish people for disposing of wastes, but what we do want is to have a system in which the waste-generators bear the relevant opportunity costs. A tax is a way of putting a price on waste disposal that reflects its opportunity costs (health, property damage, climate change, whatever). If you start from that framework, then waste disposal is just another service like any other, not a morally reprehensible act like rape or murder. In that context, I would think a tax is more appropriate.

EugenRJuly 16th, 2013 at 4:02 am

Jardinero if may i. You claim ……….There is little real world data which shows that taxes modify behavior in knowable, predictable ways and much real world data that taxes create unknowable unintended consequences………………
If so and TAX has no influence on consumers behavior, why do you care? Why would anybody care if so to impose tax at all? Why is it so hot issue? Do you care if a earth worm is deep in the earth or above the earth? would you make legislation to prevent it to scroll on the surface of the earth?
Of course you care if you have to pay tax or not, other-vice you wouldn't care to write about it, as you don't write about the position of the earth worm. But to put it more directly if you would pay for one litter of fuel 10 dollars and not 1.5 in Europe and half of it in US, would you still use private car on the daily basis or you would go back to your grand fathers time when most of the people used the public traffic? There still will be individuals who will use private cars, but only in the margins. So the tax influences the society as whole, even if not every individual.

Then you say, The primary purpose of taxation, is not to modify behavior, but to provide revenue to the state. This concept is lost in the conversation about taxes………..
Probably you did not read my explanation that the state is not only collecting taxes, but also redistributing it for different services. You may say i am against this kind of redistribution an don't want taxes. OK. i can except it as a political statement, but then you have to say that you are against all the services the government provides (Including defense and military). Or you mean you are pro president Bush the son (not the father), and you just want to create a huge budget deficit, which when blows up the whole world economy, you will leave as heritage to the next President, with the big P.

Jardinero1July 16th, 2013 at 3:53 pm

Prof Dolan's original post speaks to libertarians. I stated the standard libertarian replies to calls for taxing bads. If you want to convince a libertarian that a carbon tax is preferable to all other solutions or even preferable to just the status quo, one must address those objections. – See more at: http://www.economonitor.com/dolanecon/2013/07/15/

ThomasGrennesJuly 15th, 2013 at 3:18 pm

Isn't Coase relevant here? Assignment of property rights or agreement on rights over the global environment is essential to give the proper signals to markets. Also there seems to be agreement that a proper carbon tax must take into account taxes and subsidies on other products and relevant policies by other countries, especially China and large emitters. A final point is that carbon emissions by the U.S. have changed dramatically in recent years without a carbon tax or cap and trade. U.S. emissions in 2012 were at the lowest level since
2007. An optimal carbon tax must change in response to many unanticipated shocks.

Ed Dolan EdDolanJuly 15th, 2013 at 11:38 pm

1. Yes, Coase is relevant. I think in a sense we might say that a carbon tax reflects the view that we assign the property right for waste disposal in airspace to the government, and the government then prices it appropriately to balance costs and benefits at the margin. A Rothbardian libertarian would say assigning the right to government is the wrong way to go. The air rights should be attached to the owner of the surface rights, and the government should participate, if at all, only by way of providing courts as a means of dispute resolution.

2. Yes, an optimal tax needs to take trade into account and there is a sound argument that a tax imposed simultaneously world-wide would be better than one in a single country. It does not, however, mean that a tax of some level in one country, especially a large one, would not move the world toward an efficient outcome, even if not all the way to such an outcome.

3. Yes, an optimal pollution tax would change over time. However, I favor a fixed tax, partly on the grounds that we should not let the best be the enemy of the good.

EugenRJuly 16th, 2013 at 4:10 am

Just a short remark, the Chinese pollution was caused by production of industrial items for the US and EU markets. If there would be no such an unprecedented demand for made in China gadgets, Chine with its level of consumerism even with its huge population would not pollute so much the earth. So i would say it is easier to put carbon tax on the fuel in US, than to start an economic war against China, based on claim that they destroy the environment (or the US production capacity).

EditorJuly 16th, 2013 at 3:15 pm

This article is ill-researched.

Libertarians invented the pollution fee as an interim measure until technology restores us to pre-industrial pollution levels. Many Libs object when as a tax it goes not to compensate the polluted or aid development of anti-pollution technology but into other areas such as political salaries or wars.

For info on Libertarianism see http://www.libertarianinternational.org

SnarkFetishJuly 16th, 2013 at 3:42 pm

"a carbon tax reflects the view that we assign the property right for waste disposal in airspace to the government" —
This is precisely the mentality and the insidious eventuality of our government-induced culture of dependency.
Allowing politicians to claim airspace as a property right?
Why not water-space?
Why not sound space?
Since all bodily functions affect one or more of the three, why not allow government to claim a property right over my body as well?

"…what we do want is to have a system in which the waste-generators bear the relevant opportunity costs"
The issue for me here is the presumption that "we" need a "system."
I suppose humanity will simply not be dissuaded from dabbling in the folly of social system-craft. It's a compulsive behavior born of fear, approval-seeking, and advantage-seeking.
"We" is a problem because it really means government, which really means politicians, which really means individuals who seek power at the expense of other individuals.
"System" is a problem because it is the means by which the individuals who crave power induce conformity in the individuals over whom they exercise it.

Liberty is individual solutions to individual problems, needs, issues.
If a man throws a cigarette butt on the ground, would you speak to him about it?
He probably thought nobody saw.
If a company dumps chemicals into a lake, do the people who have a choice about buying their product know about it? Would they still buy it if the knew?

Once government is out of the equation, the possibility for legitimate solutions blossoms.

BonnieGoodellJuly 16th, 2013 at 4:12 pm

So, I, once again, propose that instead of a carbon tax, we have worldwide climate change disaster insurance. It could be privately run. Just make the producers of atmospheric carbon liable for the nuisance they create that damages others. Make them pay for the damages. Let them get insurance. We have good and getting better all the time, actuarial data to differentiate what part (%) of a given extreme weather disaster is the result of carbon-induced climate change. Let New York sue Exxon (if that is the wasteful way we want to handle it) over Sandy, and farmers sue over losses due to increasing extremes. Fisher-folk for the damage to oceans from acidification. UN and international courts if that's what it takes.

Jardinero1July 17th, 2013 at 10:05 am

I would underwrite that personally, and I would make a fortune, because I would never pay one dime in claims. There is no evidence that CO2 emissions have ever harmed a single human being. Ever since humans starting elevating CO2 levels in the atmosphere; society, collectively, has grown richer and richer. The correlation between increased CO2 emissions and the increase in wealth is irrefutable and there doesn't appear to be an inflection point anywhere on the horizon.

Ed Dolan EdDolanJuly 17th, 2013 at 12:17 pm

1. You say, "There is no evidence that CO2 emissions have ever harmed a single human being." I think that is an overstatement. There is some evidence that GHG driven climate change has increased the frequency of damaging storms. I agree the evidence is not conclusive. However, you should offer a rebuttal rather that stating that no such evidence has been advanced.

2. You say, "I would underwrite that personally . . . The correlation between increased CO2 emissions and the increase in wealth is irrefutable." Insurance companies that underwrite on the basis of correlations alone, without consulting causal models, are asking for trouble. Your approach reminds me of AIG writing default swap protection on mortgage-backed securities, which was a sound business strategy based on the "irrefutable" notion that US house prices had never fallen, based on data up to 2007.

3. You write, "there doesn't appear to be an inflection point anywhere on the horizon." History is littered with inflection points that no one saw coming. The most famous is the inflection point in the curve of human population growth, unrecognized from Malthus through "The Population Bomb," but now apparent.

Jardinero1July 17th, 2013 at 12:59 pm

1. I work in the insurance business on the Texas Gulf Coast. I write windstorm and flood. No carrier I work with, nor anyone in the industry has any data that suggests an increase in the frequency of damaging storms. But there has been a huge improvement in measurement that now record storms that previously went unnoticed or were not measured accurately. At the same time, there has been an enormous amount of real estate development in areas that are most likely to be hit by damaging storms.
2. Health and life insurance contracts rely on both causal and empirical models to set rates because of the necessarily long term nature of the contracts. Property and casualty insurance contracts are finite, from 30 to 365 days, typically. Because of the finite nature of the contract, P&C actuaries rely primarily on large amounts of accumulated statistics and less or not at all on causal models to set rates. Because of the brevity of the contract, past performance is more reliable indicator of profitability than causal models. Rates can be adjusted as policies expire, or markets can be abandoned, altogether, within the timeframe of one policy period, if the data doesn't support it.
3. If there is an inflection point on the horizon, it will be because policy makers shifted to a policy of less reliable, more intermittent and much more costly forms energy generation. One of the chief drivers of wealth, for the last 250 years, has been the availability of reliable and inexpensive energy generation.

Ed Dolan EdDolanJuly 17th, 2013 at 1:26 pm

I am not suggesting that the evidence on greater storm damage comes from within the insurance industry. However, the possibility is widely discussed in climate circles.

For example, the American Museum of Natural History, which we would not normally think of as a hysterical fringe organization, presents greater frequency of storms as an established fact on its web site ( http://www.amnh.org/exhibitions/past-exhibitions/… ). Very likely they should be more cautious in their presentation, but I doubt that they have come to their conclusion in the complete absence of supporting evidence.

As an example of research from a credible institution that purports to find evidence of such a trend, consider the study by MIT's Kerry Emanuel that is discussed in detail here: http://www.amnh.org/exhibitions/past-exhibitions/

If your insurance colleagues are unaware of such studies, I suggest they look at them. Perhaps they already have looked at them and do not find them conclusive. Again, I am not saying that studies like Emanuel's are right or wrong; they are out of my field of expertise. Still, I think you are overstating your case to suggest that no such line of evidence exists.

Jardinero1July 17th, 2013 at 1:59 pm

Wouldn't you think that the people with the most skin in the game would be discussing aloud the issue of increasing frequency of storms if that in fact was the case? They set the rates and they pay the claims. Every insurance carrier I deal with attributes rising windstorm and flood rates to increased concentration of risk in wind and flood prone areas, not to an increase in windstorm or flood itself..

Ed Dolan EdDolanJuly 17th, 2013 at 5:23 pm

Yes, I would think that.

I'm getting off my turf here and onto yours, but I'd like to continue the discussion. For example, I ran across this report about the preparedness of insurance companies on the website of Ceres: https://www.ceres.org/press/press-releases/is-the

Among other things, the report finds that not all insurance companies ignore climate change as a risk factor. Ceres finds that 23 companies out of 184 surveyed are adequately prepared for climate change risks. Smaller companies, they find, are more likely to be unprepared. Also, the report criticizes state regulators for failing to encourage/enforce disclosure of companies' preparedness for climate risk.

In general, the report appears to think that planning for climate-change preparedness should be an integral part of prudent business practice, especially for P&C insurance.

Would you care to comment on the Ceres report?

Jardinero1July 17th, 2013 at 6:07 pm

According to the website: "Ceres is an advocate for sustainability leadership. Ceres mobilizes a powerful network of investors, companies and public interest groups to accelerate and expand the adoption of sustainable business practices and solutions to build a healthy global economy." I think CERES probably would benefit more from the counsel of the P&C industry than the other way around. The P&C industry has 350 years of practice at assessing and pricing risk, as well as at counseling insureds on how to reduce their exposure to risk.

Anyhow, I read the press release you link to, but not the report. If I read the press release correctly, the majority of P&C insurers don't consider climate change at all. I am sure the view of those who don't, is that they don't have to, since policy periods are a year or less and climate change, as it occurs, occurs over generations. Also, the P&C carrier deals with weather events, not climate events and all weather is local. The P&C industry does definitely keep count of weather events and the consensus is the numbers have not changed but the exposure, especially for property, has changed.

I would ask CERES, how does one adjust premiums for policyholders on the off chance that the climate will be warmer or colder, or windier or wetter or drier in fifty years.

Ed Dolan EdDolanJuly 17th, 2013 at 6:54 pm

Thanks. Makes sense. I can see that the different time horizon makes a big difference between the insurance view and the public policy view.

Perhaps a sensible feedback from insurers to policymakers is that if they are worried about the longer-term effects of climate risk, they should begin with policies that discourage development in areas that will be at risk over the lifetime of investments in construction and infrastructure, or at least make sure their policies are not encouraging such development.

Also, I suppose people who build in such areas should consider whether their insurance will continue to be available at current rates over the lifetime of their property.

Jardinero1July 17th, 2013 at 8:53 pm

I am in agreement with you. The federal subsidization of Flood insurance and the state subsidization of wind insurance in the Gulf Coast states is a major pet peeve of mind. I posit that in the absence of the subsidy to these two forms of insurance that much, much less development would occur in these loss prone areas. And yes, a sense of entitlement has developed among coastal residents for subsidized insurance because it's "good for the economy".

Jardinero1July 17th, 2013 at 8:58 pm

In Texas, nearly ninety percent of property in the first tier coastal counties is insured through the state windstorm pool. Private insurance carriers, long ago, rightly abandoned the first tier coastal counties because of the high likelihood of catastrophic loss. The legislature created a state subsidized wind insurance pool to guarantee that real estate development could continue. This is true along the rest of the gulf coast to florida.
I firmly believe that without the state wind insurance pools, there would be little or no real estate development in coastal counties. This is supported, historically, by the fact that the most intense coastal development in Texas occured after the state wind pool was created. I wish that more attention were focused on the role that taxpayer subsidized wind insurance played in coastal degradation.

DRWallJuly 18th, 2013 at 10:56 am

If a carbon tax is a price paid to the government for impinging on someone's (the people's?) property right (to the atmosphere?), how does the price get set? Does the government maximize its income as the sole owner of the nation's portion of the atmosphere by charging as much as it can without losing market share to competing nations? Since we really have no idea how much climate change will cost us in the future, let alone how much any given amount of GHG emitted will cost us, how much weight should be placed on the projected drag of such a tax on other areas of the economy?

Ed Dolan EdDolanJuly 18th, 2013 at 1:27 pm

Probably revenue maximization for the government would not be the best approach. There is great uncertainty about what the optimal amount of a carbon tax would be. I have seen estimates from $3 to $300 per ton. ($1 per ton is roughly equivalent to 1 cent per gallon of gasoline). My suggestion (in Part 1 of this series) is to start with a relatively moderate tax, say $20 per ton, which would be enough to give a nudge to investments in energy conservation and energy diversification, helping to build resilience of the economy.

EricFJuly 29th, 2013 at 4:37 pm

This is starting to get at the question I have. Having read all three posts (Progressives, Conservatives, Libertarians) I can't tell how you think revenue from a carbon tax would, or how best it should, be applied to address the actual issue of climate change. In the conservative and libertarian posts, you argue that the tax might be palatable if there were compensatory reductions in other taxes. Does this mean you think the marginal increase in cost would spur a blanket deployment of non-carbon fuels and fix the problem? I should think not since (I thought) I saw reference to a paper on the limited capacity, globally, of renewables.
This would leave the options of direct fixes (i.e. CCS or more fanciful geoengineering) or else compensation for victims of global-warming induced costs as advocated by BonnieGoddell. In either of those cases there are additional out-payments from the carbon tax revenue so the carbon tax could not all be devoted to reducing other taxes (without parallel reductions in other spending but let's not get into that!)
I'd be interested in your thoughts on how the impact of taxation would play out and how the government ought best to allocate and redistribute the funds.

Ed Dolan EdDolanJuly 29th, 2013 at 10:20 pm

Thanks for reading all three posts and commenting on them as a group. You ask some good questions.

1. As for what to do with the tax, I would make two points. First, my main focus is on the effects of the carbon tax on conservation and the energy mix. I see what to do with the tax revenue as a secondary issue for P's, C's, and L's to bargain over to get a coalition together to support the tax. P's might want to spend some of the revenue on something else rather than having pure tax neutrality, although even P's might buy into tax neutrality of one of the taxes that got a significant reduction was the highly regressive payroll tax.

2. The marginal increase in the cost of high-carbon fuels might give an incremental boost to low-carbon fuels, whether traditional, like natural gas and nuclear, or advanced, like algae diesel or something. However, you are right, I did reference Ozzie Zehner about the limits of "clean" energy. I would expect a big part of the payoff to come via greater energy conservation through investments and behavior changes.

3. Compensating pollution victims does have philosophical merit. How to do it when there are many victims, many of them across international boundaries, is harder to see how to do.

4. Geoengineering could be part of the mix, but I am not specifically arguing for it.

Robert MuseJuly 20th, 2013 at 1:42 pm

So you want a carbon tax? If you really wanted to clean up America and reduce unemployment to 2% you take you carbon tax and mandate a superior rate of return on cans, bottles, paper and recyclables. How? Do you really think a majority of people are going to pick cans or bottles for $.05 each? Make it a $ 1.00 a can or bottle and you would have solved numerous economic and social issues. The carbon tax collected must pay for this $ 1.00 per can or recyclable not your 401K trading options that the author and others would like to use enhance their progressive wealth. The carbon tax must pay for and only be used to recycle as a form of individual wealth building and reduction of land fill volumes. The point of the exercise for a carbon tax is who really benefits the Wall Street trader, government agency regulatory employment, or the individual as they trade on your ability breath? As outlined in article definitely not the individual.

BonnieGoodellJuly 21st, 2013 at 2:41 pm

sorry to be so long getting back, Jardinero 1. First I think the actuarials are already working hard on what that increment of risk is for carbon-nuisance damages. People are screaming about the rising rates for federal flood insurance, crop insurance, fire insurance and for other carbon-exacerbated disasters. I suggest that the most expedient way to move ahead on this might be an expansion of the world court to include the right of local governments to sue for damages. I like it when their are as few market skewing "buffers" as possible to putting the costs into the marketplace. If you tax and the money goes to general funds politicians have an incentive to promote the activities that maximise those tax collections. Into special funds that subsidize alternative infrastructure? Creates a new subsidized constituency, and we have seen how well that creates public benefit with our tax subsidies for the health insurance industry. The marketplace works, but every buffer makes it work less well. Make container sellers deal with their own containers. Their choice if they want to pay for local landfill, take them back to recycle. Pay at the pump for insurance and roads. Price all mined products to cover first-class clean up, and insurance agaisnt futurre damages. Rich people want to use lots of energy in locations that they have NIMBYed so that the power plant is further deteriorating the property values of people with less clout? make them bid for what they will pay the communities who accept the locally unwanted land uses (LULUs).

I think there is almost always a way to make it more direct than it is now. I think most of what we have now is the use of government by elites to transfer costs to poorer people and
and income and assets to richer people. It is structural. Why didn't Occupy Wall Street occupy themselves suing for damages on behalf of the "inexperienced non-experts" at the other end of the mortgage-backed securities scam – those who took out the mortgages and lost everything?

Same reason more black teenagers go to jail for stealing a car for a joyride and white teenagers "are just being kids" who need to be protected until they grow out of it. Structural.

Health care is the exception that proves the rule, seems to me, but even there, single-payer needs some market discipline.

IkuyasuSeptember 1st, 2013 at 6:03 pm

I am surprised to find that there are still people who believe the global-warming-because-of-the-rising-the-amount-of-CO2-level-in-the-atmosphere scam.